Wednesday, January 14, 2015

Spend&Spend and Borrow&Borrow

OK – now that the latest nonsense from Robert No Relationship to Paul Samuelson has been thoroughly debunked, let’s turn our attention back to the long standing fiscal policy debate which Ronald Reagan once quipped something about “tax& tax and spend&spend". Yes, we got the 1981 tax cut for high income groups but we also got continued spending including an increase in defense spending. Brad DeLong described the policy discussions back in 1982 as follows:

As I understood it then and understand it now, five things were happening:
(1) Paul Volcker was trying back in 1982 to do what Alan Greenspan did in 1993–to condition a lower interest-rate policy on the administration’s taking the first step and committing to long-term deficit reduction, and the Reagan administration was stonewalling.
(2) Ronald Reagan’s Treasury Department was engaged in a quiet and seeking a public administration-wide Reagan-led campaign to convince the Federal Reserve to lower interest rates.
(3) Ronald Reagan’s communications staff was engaged in a quiet campaign to convince the Federal Reserve to lower interest rates, but was opposed to any public Reagan-led pressure as bad for Reagan’s image as a man in control of the government.
(4) Reagan’s Council of Economic Advisors was on Paul Volcker’s side.
(5) Reagan’s own personal papers are singularly unilluminating as to what he thought and was trying to do.

Brad notes several New York Times discussions from 1982 including this one:

After being warned today by Republican Congressional leaders that his budget could not be approved in its present form, President Reagan said that he wanted to give Congress ''running room'' to cut the budget to reduce the deficit. But he said that he was not ready to compromise on his plans to reduce income taxes and increase military spending.

Of course if one is not willing to cut defense spending or raise taxes – then how serious can one be about fiscal responsibility? The 1993 accord between the Greenspan FED and the Clinton White House was mainly accomplished on the fiscal side by a combination of tax increases and the “peace dividend”. And as I watch the coverage surrounding the movie Selma, I am reminded of certain CEA discussions with Lyndon Johnson on fiscal policy in 1966. We had seen a tax cut in 1964 followed by government spending for both the War on Poverty as well as the Vietnam War. His CEA warned President Johnson that if he could not reverse this fiscal stimulus, the FED would have to choose between higher interest rates versus letting inflation accelerate. Via Mark Thoma, we see this from Bruce Bartlett:

Just as an aside, I would note that Norman had been on the JEC staff in the 1960s, where he functioned as staff economist for Wilbur Mills while he was chairman of the House Ways & Means Committee. It was Mills who really got Kennedy to propose a cut in marginal tax rates in 1963, based on Ture's ideas. Since Norman was also deeply involved in the development of the Kemp-Roth bill, he was a bridge to both major tax-cutting episodes.

Norman Ture indeed was the original supply-sider who basically told Chairman Mills to ignore the CEA’s recommendations for fiscal restraint in 1966. We now know the unfortunate history of politics not heeding the advice of sensible economists. And yes – the supply-siders once again pushed for fiscal stimulus in 1981. How did that work out? I bring this up today in light of the fact that Mitt Romney is once again running for President. The last time he did so, he advocated large tax cuts without any serious consideration of how to pay for them. I’m sure Romney will have plenty of supply-side enablers once again.